On the fallacy that the U.S. taxpayers made money on the bailouts, note that in finance deals get judged by how much money they make given the risk that had to be assumed to make it. In the case of the bailouts:

$614 billion was disbursed

$667 billion was recouped

For a difference of $53.1 billion, i.e. 8.6%. [1]

8.6% is insultingly low compensation to use taxpayer money that, by the way, could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. FWIW the average junk bond yield in 2009 was above 20% [2].

[1] http://projects.propublica.org/bailout/ [2] http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bond...

The risk was incredibly low. The banks were rather profitable, but they had cash flow issues from deleveraging. And credit vanished in 2008.

For the government's balance sheet, getting paid back 8.6% is a lot more reliable than your gut instinct of infrastructure or education or (especially!) health care.

Many argue and I, for one, agree the the problem was not illiquidity but insolvency [1].

[1] http://www.washingtonsblog.com/2008/10/the-problem-was-never...

If the risk was so low, why couldn't a private entity bail out the banks? Would have been a gangbusters investment, right? 8.6% is a good return for that risk?

How many entities do you know with almost 700bn in the bank ?

The point of the bailout was to throw all the might of the State behind the sector, in a "ye shall not pass" stance that basically stated that either we cut these banks some slack or our current civilization would burn in flames.

It worked, because people got the message and business eventually went back to normal. We can disagree on whether it was "good enough" (I thought the opportunity for deeper changes was ripe, but I'm just an old-school eurosocialist myself), but I don't think any other entity could have done it except Nation-States.

> or our current civilization would burn in flames.

Wait a minute, just a minute. The way I see it, the US government didn't disarm a nuclear bomb, it just saved Goldman Sachs (and it's creditors AIG) and let Lehman Brothers die. Smart choice by Henry Paulson, I'd expect no less by a former senior GS manager.

It used tax-payer money and I'd be angry if I were an American. I'm angry at the Greek government who did the same thing (among many other things), but then again. I live in Greece, I get a choice (More than 30 parties run in the elections last time I checked...). In the US I get the feeling that you can vote Democrats or Republicans. Largely disputable policies like this, are never going to change.

I'm not saying I agree with that line, I'm saying that this is what the (Bush II) government was signaling at the time. (Which for them was likely true -- losing Lehman, Goldman and AIG in a month would have destroyed a world of wealthy executives.)

Greece is another matter; the problem there was not with the bailout, but with stupid terms imposed by the troika to cover debts. In fact, if the troika had behaved with Greece in the same way the US government did with US banks (putting up cash right away, no questions asked), Greece would not have suffered what it did.

At the time, I supported letting Lehman die. Take your medicine, screw-ups!

I was wrong. It's largely regarded as a bone-headed move today. It was the start of the meltdown.

The losses would have to be written off somehow, maybe it could have been done more slowly, but I wouldn't think too much about the trigger for the crisis.

>How many entities do you know with almost 700bn in the bank?

None but no single institution needed that much. Private investors, especially when working together, could have certainly stumped up funds for individual institutions. In fact, in the case of AIG such an overture by Chinese investors was rejected: http://www.nakedcapitalism.com/2014/10/aig-bailout-trial-bom...

That's not "private investors", that's the Chinese government. This would have had clear political implication (the Chinese already hold a lot of US debt etc etc), but regardless, it was Nation-States making moves -- basically the only players in the game, on that size of petty cash.

> How many entities do you know with almost 700bn in the bank ?

quickly tabs over to lookup Apple's balance sheet

nope. but give it another few years. ;-)

Our current civilization would burn in flames? What a load of poppycock.

Warren Buffett, one of the few with the liquidity to invest at that time, did just that.

If the risk was that low you would have thought that a lot of rich guys would have stood in line to buy up the banks' assets.

Credit crunch. No one was loaning any money to anybody.

> On the fallacy that the U.S. taxpayers made money on the bailouts

> 8.6% is insultingly low compensation to use taxpayer money

So, money was made?

> could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance.

Why couldn't it still be used on infrastructure, education, or healthcare?

Money were made but not enough compared to the risk involved with lending them out. Thats the point.

The parent asserted that, but did not actually quantify the risk in any way. I could just as easily say that there was no risk at all since the government was obviously not going to allow those institutions to fail.

One way to infer: what's the risk of lending to a company that's facing an existential crisis, that's in such dire straits that no one else would lend to it?

The claim that I answered where "Money were made" it didn't quantify it either so I fail to see the point.

This ignores the risk of not lending them out, which is difficult to quantify, but is considered significantly greater than 0.

Not sure I understand. The difficulty of lending them out should just increases the risk of lending them out and therefore the need to recoup that risk by a proper margin.

Thats not what happened when the banks regardless of contracts still gave out large bonuses many times more than the return to the taxpayers.

That simply doesn't add up.

The risk of not lending the banks out is a depression where the currency / global economy may have lost more value.

Example: The gov only made 8.5%, but if the US costs have increased 16% over the same period (because of a depression), the overall return is more like 24.5%, ignoring the additional costs of a depression.

Bot possibly, even probably, enough compared to the risk involved with not lending them out (i.e. another depression).

You assume there's no other way to avoid a depression. The banks can be bypassed, even if that would be a bit unconventional.

Thats irrelevant to how you calculate what the return should be compared to the risk involved.

Why? Loss of tax revenue to the government resulting from a depression is certainly money that the government needs to factor into the calculation.

Because it's embracing too big to fail. Unless we want 'too big to fail' to be the rule going forward, and unfortunately it seems that it will be, we should reject the idea that the rest of us are the beneficiary of having to bail out the banks.

Whether we embraced it or not, it was part of the calculus. So was the fact that we'd need continued investment into the economy to work our way out of the financial collapse. That meant that options like nationalizing banks, which might drive investment overseas in the future, could have a direct negative economic impact that needed to be considered.

The total loss in tax revenue over the Great Recession period is measured in trillions.

http://2.bp.blogspot.com/-nkdzCkw8Rr0/U-qiPe1Tf-I/AAAAAAAARS...

I'd suggest that's a much more direct and obvious economic impact than some maybe-perhaps about driving investment overseas. (How, exactly? Do you think money would suddenly stampede out of the US if regulators developed a spine and jailed the delinquent operators who caused the crash?)

Anywway - clearly the decision was political. It was made for the benefit of the banker caste, and not for the general population.

The underlying problem is unearned privilege.

There's no rational reason for these bonuses. But bankers pay themselves these sums because they know they can, irrespective of the incredible damage they cause to the rest of the economy.

Sure, I agree that we had no choice at that point but to bail the banks out.

But when reviewing the decision afterwards, I think we need to reject lines of argument that the government did really great on the deal so it's not that bad what happened. We don't want it to happen again, we don't want to be in a no-other-options situation.

Sure but so is the danger of going bankrupt for the banks or being completely nationalized.

Also the country would survive a depression if it really came down to that, the bank wouldn't survive a bankruptcy.

So the playing field are fairly even when it comes to having leverage.

"Made."

> So, money was made?

I don't know the details of when the money was disbursed and when the money was recuperated, but if it were disbursed in 2008, and recouped in, say, 2014, there was a 10% rate of inflation, which devalues the currency to the point that no, money was not made.

If 2013, the rate of inflation was 8.2%, which leaves a .4% "profit", assuming no other costs.

If 2012, the rate of inflation was 6.6%, leaving a 2% profit, etc.

Of course, this assumes the money wouldn't have performed in any way just sitting in the government coffers, and I honestly don't know enough to even begin to evaluate whether it would have.

Inflation was 1.5-1.6%.

http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt

edit: computation done by comparing Jan 1 2012 to Jan 1 2013, etc.

Between which dates? If I'm reading this correctly, Jan 08 to Jan 14 is 212 to 234, which is about 10%. (This also matches the statistic that I happen to have memorized of 8% inflation between 2010 and 2014.)

$614billion is almost 30 times NASAs annual budget. We could be on our way to Mars right now.

If the state got its money back, it means that money wasn't paid away in bonuses.

No, the state might have got a better return without bonuses (although I cant remember how the deal was structured). Mind you you could argue that getting a sweet deal like that deserves a bonus...

It is certainly a better deal than the Irish bailout, which will never be paid back and amounted to 100% of GDP.

Yeah, but when the bank needs loans to stay in business it shouldn't be paying out bonuses. Particularly so if the government (i.e. taxpayers/us) went through giant efforts and took a significant amount of risk to hand out these 'loans'.

EDIT: I believe that the bailout was needed and it did (IMO) prevent significant negative ripples from flowing through our financial system. What I really despise is the lack of discipline and regulatory oversight during the bailout process. This left a very sour taste in many struggling Americans and demonstrated that our political structures are incapable of focused, regulated, and disciplined action.

Those banks had contracts with the executives, saying they would get the bonuses if X metrics were met (likely what it was, maybe it was just a straight bonus every year, and the assumption is that they would be fired if they didn't preform). Those contracts don't go away because of a bailout.

I would be interested in legislation that changes this. If a private bank (I don't think there are many truly private banks anymore) wants to give whatever bonuses it wants, I really don't care.

But once public money is involved, I agree we need some strict controls.

Notice that you're effectively saying "the bailed out banks should renege on contracts". If nothing else, there's enough money on the table that the affected people are likely to litigate, and there's a fair chance you'll just end up paying the bonuses just the same, but now topped off with the expenses of a lawsuit.

Are the bonuses often contractual and not discretionary? If so, they're not really bonuses.

Contractual doesn't mean guaranteed. You could have a bonus that's contractually tied to a certain set of conditions being met (e.g. personal objectives). If the employee meets those objectives and the company doesn't pay out, they could be in breach, regardless of their financial situation.

They are bonuses, but the word "bonus" means slightly different things in different industries. In the banking industry, think of it more like a sales commission than a totally optional check for doing a really good job. It's paid out according to a pre-determined formula, not the whim of a manager.

Which makes sense. In the cases of financial institutions needing a bailout while simultaneously paying huge bonuses something must be seriously miscalibrated in their calculations.

Jailing the people responsible for committing criminal misconduct and confiscating their gains seems like a nice solution to this dilemma.

Isn't reneging on contracts a standard part of bankruptcy?

The whole purpose of the bailout is that there is no bankruptcy to begin with.

How do you think banks work? They are see-saws of money on one big balance sheet.

Also the regulatory situation in Europe is still much more stringent than in the US. In US banking there are a load of utter time wasting rules that provide little sanity to the issues suffered

Not to mention the unquantifiable damage taxpayers took because the economy went bye bye and they were unable to pay their loans and mortgages.

You can make a heck of a lot of money if you kill the economy, get bailed out and get to keep the properties and houses of the little guys that don't get the same benefits.

If you really wanted the economy to recover quickly you would be bailing out taxpayers not big corporations.

Not to burst anyone's bubble, but banks need loans to stay in business per definition. Especially in a Glass-Steagal world.

Also, the payment of "bonuses" in the banking industry are essentially an extension of salary. It's not what you'd typically think of as a bonus for hard work during the year. Bonuses are often pre-negotiated and pre-determined, just like a salary is.

Are you referring to investment banking/trading/PE or what? This is definitely not true in IB or trading. Your bonus is a direct function of what you make. This is particularly true for even more senior partners in IB/trading firms. The rainmakers make significantly more money than 'operating' or 'non-money-making' partners.

Right... but if you "punish" a very successful trader by giving him/her a lower-than-agreed-to bonus (for traders, the bonus should be a percentage of their realized PnL) because of actions of some higher-level executives, the only effect that will have is that the trader will go to a different company that will pay him what he is worth.

> Your bonus is a direct function of what you make

Isn't the point of the article that this is demonstrably untrue?

Not quite. The article is pointing out that the overall level of bonus is not well correlated with the revenue (or profit) of the companies as a whole. The poster is pointing out that that's largely because an individual's bonus, particularly in areas like IB (where most of the bonus pool ends up), is much more of a function of the revenue the individual brings in.

Part of the reason for the discrepancy at the time of the crash is that, until the liquidity crisis gummed everything up, most of the catastrophic losses where in a relatively niche area. A lot of the other parts of the banks did continue to make money.

Then when the liquidity crisis hit, the view was, generally, that significant parts of the businesses were still fundamentally sound so there was no point losing good people as they'd be needed to build things back up again.

I happen to think that all this is sensible up to, but not including, the bit about losing good people. This was fundamentally self serving and tended to define "good" as those who were successful is a overly risky environment.

It would make some sense, perhaps, if employees with no responsibility for the catastrophic losses still received some bonuses -- though the company's ability to pay the full bonus ought to be factored in.

What doesn't make sense is that anyone involved with the losses or in the management chain of anyone who was should still get any bonus at all. That, obviously, includes the CEO. If the CEOs of these companies still received large bonuses -- and my impression is that they did -- that is fucked up.

I believe that most, if not all, of the CEOs of the worst affected companies lost their jobs. Having said that, there would have been a fair few golden handshakes so your point is valid.

To my mind the worst of those was Stan O'Neill. He got kicked out when it was just a disaster but not yet a catastrophe (when the mortgage losses were known but before the liquidity crunch) so he walked away with something heinous like $160mm.

A bank might make a $20M loss on trader A's strategy but a $10M gain on trader B's strategy, for a net loss of $10M. Then trader B gets a bonus and the company that lost money is giving out bonuses.

You're assuming that their performance is directly proportional to the performance of the market as a whole. My understanding is it's tied to how they perform against an index like the S&P 500. The S&P 500 lost something like 50% over 2008, so even if a trader lost 25%, they outperformed the market by a lot and deserve (according to their contract) the bonus.

>Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense

This is short-term thinking; it gets you out of the mess you're in today, but it encourages more of the behavior that caused the mess to begin with.

Exactly. That was a perfect textbook example of moral hazard.

http://en.wikipedia.org/wiki/Moral_hazard

>the government actually made money on those loans (AFAIK).

Nope. Explanation here:

http://www.interfluidity.com/v2/2587.html

Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.

...

After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they control (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)

Exactly! I'm sure I can find a place to park the money with a semi-decent growth rate for a few years if the US Government gave me a few billion dollars and told me to come up with a modest return at my leisure...

Especially if I could use them to make a tails-they-lose-heads-I-win bet.

While it's true that banks continue to receive better-than-usual rates from the government, I don't entirely buy this reasoning. Firstly, the liquidity (i.e. "risk") is essentially free for the government/FED (printing money etc.). Secondly, I believe that if the government failed to act to prevent another depression, the loss would be far greater - if nothing else, there would be a huge loss associated with covering of the insured deposits if a commercial bank failed (which would be very likely if any big financial institution failed, because they are so intertwined).

I do think, however, that after having been "bailed out", a business should have a very high tax rate on profits (90 - 99%) for a number of years/decades.

I don't believe making a profit was the government's intention. Stopping a credit freeze was. Would you have the US government behave as a payday loan lender? If not then what's your point?

Why couldn't the government offer those loans directly to main street until the credit freeze subsided? Just take one of the worst banks, nationalize it when it goes bankrupt, sell everything except the lending branch and use it to lend to main street with printed QE money. Divide it into bits and sell it when economy looks good again.

>Would you have the US government behave as a payday loan lender?

Yeah, towards the big banks I definitely would.